Social Security Personal Accounts? Yes!

About the Author

Wishful thinking and
political rhetoric won't fix Social Security. The problem is
simple. Baby boomers, who begin to retire in about three years,
didn't have enough children. When millions of boomers retire, there
won't be enough taxpayers to pay their benefits without huge tax
increases.

Neither economic growth nor balanced budgets will fix this
problem. Social Security benefits are based on earnings. As the
economy grows and people earn more, Social Security will end up
owing more in benefits.

As for balancing the budget, any family knows it is easier to
pay your bills if you live within your means. However, $100,000 in
home repairs stretches family finances well past the breaking
point. Once Social Security needs additional money, it will need an
amount equal to today's national debt in the first 20 years alone -
and things only get worse after that.

There are only three solutions: raise taxes, cut benefits or
make the taxes we already pay work harder in personal retirement
accounts. The first two aren't very attractive. Social Security
benefits are too low now, and raising payroll taxes reduces
jobs.

But accounts do work. My 18-year-old daughter, Meredith, could
receive twice what Social Security will be able to pay her by
investing her taxes in some form of government bonds. She would do
even better by investing part of the money in stock index funds.
The accounts would be centrally managed and automatically invested
to keep costs low (the Social Security Administration says about 30
cents for every $100). Instead of trying to pick individual stocks,
the accounts would invest in funds made up of bonds and every stock
traded on an exchange. To reduce risk, older people's accounts
would hold fewer stocks and more bonds.

Personal accounts are practical and feasible. More important,
the money in those accounts would be yours, and not subject to the
whims of a politician. If you died young, it would go to your
family.

This system will cost money to set up. Opponents like to dwell
on an exaggerated cost estimate but don't mention that it is less
than one-third the cost of doing nothing. And neither today's
retirees nor those close to retirement will see their benefits drop
by a single cent.

We have a choice: fix the problem or leave a mess for our kids.
Accounts are the only answer.

John is a senior research fellow for Social Security at the
Heritage Foundation.